DIRECTORATE GENERAL FOR INTERNAL POLICIES - …

1 DIRECTORATE GENERAL FOR INTERNAL POLICIES POLICY DEPARTMENT A: ECONOMIC AND SCIENTIFIC POLICY European Energy Industry Investments STUDY Abstract This study was prepared at the request of the European Parliament's Committee on Industry, Research and Energy (ITRE). The paper provides an overall assessment of European investments in the electricity sector. It concludes by providing policy recommendations to facilitate the investments in the electricity sector which are needed to enable a transition to a low carbon energy supply, while realising a fully integrated and interconnected electricity system, enhancing competitiveness and ensuring security of electricity supply. IP/A/ITRE/2013-046 February 2017 PE EN Policy Department A: Economic and Scientific Policy This document was requested by the European Parliament's Committee on Industry, Research and Energy (ITRE).

2 AUTHOR(S) Luc VAN NUFFEL, Trinomics Koen RADEMAEKERS, Trinomics Jessica YEARWOOD, Trinomics Verena GRAICHEN, ko-Institut Iberian case study: Mar a Jos L PEZ; Alicia GONZALEZ; Juan Luis MARTIN, Aether German case study: Sylvie LUDIG, ko-Institut BEMIP case study: Foivos MARIAS, Trinomics RESPONSIBLE ADMINISTRATOR Dagmara STOERRING / Bal zs MELL R EDITORIAL ASSISTANT Janetta Cujkova LINGUISTIC VERSIONS Original: EN ABOUT THE EDITOR Policy departments provide in-house and external expertise to support EP committees and other parliamentary bodies in shaping legislation and exercising democratic scrutiny over EU INTERNAL POLICIES . To contact Policy Department A or to subscribe to its newsletter please write to: Policy Department A: Economic and Scientific Policy European Parliament B-1047 Brussels E-mail: Manuscript completed in January 2017 European Union, 2017 This document is available on the Internet at: DISCLAIMER The opinions expressed in this document are the sole responsibility of the author and do not necessarily represent the official position of the European Parliament.

3 Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the publisher is given prior notice and sent a copy. European Energy Industry Investments PE 3 CONTENTS LIST OF ABBREVIATIONS 8 LIST OF BOXES 12 LIST OF FIGURES 12 LIST OF TABLES 14 EXECUTIVE SUMMARY 16 INTRODUCTION 19 Context and main objectives of the study 19 Reading guide 20 INVESTMENT NEEDS IN THE ELECTRICITY SECTOR TO REACH THE ENERGY AND CLIMATE POLICY OBJECTIVES AND TARGETS 21 Objectives of European energy policy 21 Energy and climate targets 22 2020 targets 23 2030 targets 25 2050 targets 26 Analysis of the impact of the energy and climate targets on electricity investment needs 27 Investment needs in power generation 28 Investment needs in transmission and distribution grids 31 Investment needs in storage 33 Investment needs on the demand

4 Side, including demand response 34 Concluding remarks 35 ANALYSIS OF DRIVERS AND BARRIERS FOR ELECTRICITY INVESTMENTS 37 Economic and energy market aspects 39 Electricity demand growth is no longer a significant driver 39 Decreasing income for conventional power plants is a major barrier for new investments 40 Decreasing price volatility and regulated prices are hindering investments in flexibility on the supply and demand side 42 Electricity market concentration and size 43 Availability and cost of primary fuel and suitable sites for electricity production 44 Reserve generation capacity margin versus peak load 44 Policy framework 45 Policy measures to support investments in RES and RD&I 45 Carbon pricing and ETS 45

5 Policy Department A: Economic and Scientific Policy 4 PE Smart metering target 46 National capacity remuneration mechanisms 46 Energy efficiency targets and measures 46 Interconnection target & PCI 47 Divergent and unstable national POLICIES 47 Institutional aspects 48 Permitting procedure for new infrastructure 48 Complexity of cross-border investments 48 Financial market and instruments 48 Cost of capital and access to public and private funding 48 Risk perception and hedging 49 Other aspects 49 Lack of public acceptance of new energy infrastructure 49 Tariffs for connection and access to the transmission and distribution grid 50 OVERVIEW OF THE EU INVESTMENT FRAMEWORK 51 EU POLICIES 51 Trans-European Energy Networks Regulation and Projects of Common Interest (PCI) 52 Notification of energy infrastructure investment projects 55 Promotion of the use of RES 55 EU Emissions Trading System (ETS) 56 EU Funding Mechanisms 56 European Fund for Strategic Investments (EFSI) 56 European Structural and Investment Funds (ESIF), including in particular the European Regional Development Fund (ERDF) and the Cohesion Fund (CF) 57 Connecting Europe Facility (CEF) 58 Research and development - Horizon 2020 60 New Entrants Emission Allowances Reserve (NER300) 62 European Energy Programme for Recovery (EEPR) 63 Overview of main EU funding mechanisms 63 ASSESSMENT OF CURRENT INVESTMENT TRENDS AND PLANS 67 Investment Trends 67 Evaluation of investment plans 855 ENTSO-E s Ten-Year Network Development Plan (TYNDP)

6 866 Projects of Common Interest (PCI) 88 Evaluation of selected national investment/development plans 92 Germany 92 European Energy Industry Investments PE 5 Iberian Peninsula 93 The Baltic States 94 Concluding remarks 95 POLICY OPTIONS TO FOSTER INVESTMENTS IN THE ELECTRICITY SECTOR 96 Identification and assessment of possible policy options 96 Assessment of the effectiveness of the proposed policy options and of their contribution to the policy objectives 102 RECOMMENDATIONS 105 Investors certainty should be enhanced by more consistent, stable and balanced POLICIES based on long term strategy and objectives 105 Targeted and coordinated support schemes to foster investments in RES 105 Research, development & innovation (RDI) should focus on promising technologies as well as on new services, market models and data management 105 Coordinated and harmonised POLICIES to stimulate investments necessary for security of supply 106 Policy initiatives are needed to facilitate investments in storage 106 Investments to increase interconnection capacity should be boosted 106 Adequate regulation and supporting initiatives to incentivise grid investments 107 Facilitate access to co-financing instruments and partners.

7 Including European funds 107 Authorities should allow carbon and electricity markets and grid operators to offer appropriate price signals to investors 108 Adequate legal and regulatory framework to facilitate investments in energy efficiency and demand response 109 Streamline and simplify permitting procedures and enhance public acceptance of energy infrastructure 109 REFERENCES 110 ANNEX 1: INTERVIEWS 114 ANNEX 2: ADDITIONAL INFORMATION ON SCENARIOS AND INVESTMENT NEEDS 115 ANNEX 3: CASE STUDY: GERMANY 124 Investment trends, market characteristics and main operators in Germany 124 Installed power generation capacity 124 Electricity consumption and peak load 126 Interconnections and transmission lines evolution (2007-2015) 127 Market Structure 129 Supporting national framework for electricity investments 130 Policy Department A: Economic and Scientific Policy 6 PE Implementation of national investment and development plans: The Network Development plan and the Federal Requirements Plan Act 132 Implementation of Projects of Common Interest (PCIs) 134 Key lessons learnt and conclusions 136 ANNEX 4: CASE STUDY.

8 IBERIAN PENINSULA 138 Market characteristics, trends and main operators in the Iberian Peninsula 138 The Iberian Electricity Market structure and main operators 138 Installed generation capacity 139 Electricity consumption and peak load 140 Interconnections and transmission lines evolution 141 Electricity tariff deficit in Spain and Portugal 142 Investments in generation and transmission 144 Drivers and barriers for RES investments 145 Drivers and barriers for conventional generation 148 Drivers and barriers for investment in grids 149 Implementation of national investment and development plans 149 Spain 150 Portugal 151 Projects of Common interest 152 Key barriers for the implementation of national development plans and PCI s 155 Structuring/financing arrangements of the PCIs and other projects 155 Prospects for achieving the energy and climate 2020 targets 156 Key

9 Lessons learnt and conclusions 157 ANNEX 5: CASE STUDY: INVESTMENTS IN THE TRANSMISSION GRID IN THE BALTIC STATES 159 Investment trends, market characteristics and main operators in the Baltic States 159 Installed power generation capacity 159 Electricity consumption 160 Interconnections and transmission lines evolution (2006-2015) 161 Market Structure 163 Implementation of BEMIP 164 BEMIP s key objectives and drivers 164 Level of implementation of BEMIP s related PCIs 165 National support for the implementation 170 EU support for the implementation 172 Key barriers for the implementation 172 Impact of BEMIP on EU energy and environment policy targets 172 Key lessons learnt / Conclusions 173 European Energy Industry Investments PE 7 ANNEX 6: NET CHANGES IN INSTALLED POWER GENERATION CAPACITY PER MS BETWEEN 2005-2009 AND 2010-2014 (MW) 174 Policy Department A.

10 Economic and Scientific Policy 8 PE LIST OF ABBREVIATIONS ACER Agency for the Cooperation of Energy Regulators BAU Business as usual BEMIP Baltic Energy Market Interconnection Plan CBA Cost-benefit analysis CCS Carbon capture and storage CCGTs Combined-Cycle Gas Turbines CEF Connecting Europe Facility CEE Central and Eastern Europe CF Cohesion Fund CHP Combined heat and power CIP Competitiveness and Innovation Programme CPI Current policy initiatives CRM Capacity remuneration mechanisms CSE Central and Southern Europe CWE Central Western Europe DC Direct current DR Demand response DST Diversified supply technologies DG CLIMA DIRECTORATE - GENERAL for Climate Action DG ENER DIRECTORATE - GENERAL for Energy DR Demand response DSO Distribution System Operators European Energy Industry Investments PE 9 EBRD European Bank for Reconstruction and Development EE Energy efficiency EEA European Environmental Agency EC European Commission ECF European Climate Foundation EEAG Environmental and Energy State Aid Guidelines EED Energy Efficiency Directive (2012/27/EU) EEE-F European Energy Efficiency Fund EEPR European Energy Programme for Recovery EFSI European Fund for Strategic Investments EIAH European Investment Advisory Hub EIB European Investment Bank EIPP European Investment Project Portal ENTSO-E European Network of Transmission System Operators for Electricity EP European Parliament EPBD Energy Performance of Buildings Directive (2010/31/EU)